The securities arbitration forum that administrators all cases in this country - the Financial Industry Regulatory Authority (FINRA) - has struck back at the seemingly inexorable morphing of the process into a litigation look-a-like. This Commentary provides a practical and timely explanation of a proposed rule change that, in early 2008, gave rise to over 100 Comment Letters to the Securities and Exchange Commission (SEC) from customer attorneys, practitioners who represent brokerage firms and brokers and law school clinical securities arbitration programs. While the outcome of the rule is being considered by the SEC, it is apparent that a fundamental change in pre-hearing procedures will soon take place.
Mr. Robbins writes: Precluded by contracts of adhesion to litigate controversies with their stock brokers, customers are obligated to arbitrate their claims in a forum where equity, and not the law, is supposed to be the guiding benchmark. To commence an arbitration, all a customer has to do is file a Statement of Claim that specifies the relevant facts and remedies sought, with the ability, if the customer wishes, to include additional documents supporting the claim. No special pleading requirements exist, as they do in court.
Many defense attorneys, however, preferring to litigate rather than arbitrate these controversies, routinely file motions to dismiss claims at the pleadings stage – to either dismiss the case entirely because of a procedural or merit-based failing or to reduce the causes of action and get the arbitrators to focus on “the real issues.” Those are the motions filed in good faith. Arbitrators, who are given no guidance by FINRA as to how to decide such motions, have been left adrift in a sea of inconsistent and often incorrect decisions. When FINRA found that a large number of motions to dismiss were not filed for laudable purposes – abusing the very process the industry created – it decided to deal squarely with that perceived abuse.
By waiving their right to litigate such disputes (whether their claims have merit or not), customers argue that the trappings of court procedures should not be imposed on them. Defense attorneys argue that if this is to be an expeditious alternative to litigation, it is a waste of time and legal fees to defend cases that should never see the inside of an arbitration hearing. FINRA’s rule proposal on Motions to Dismiss - before claimants present their case at an evidentiary hearing - provides the battle ground for that clash of positions. The proposed rule is at http://www.sec.gov/rules/sro/finra/2008/34-57497.pdf, and all 112 Comment Letters are at http://www.sec.gov/comments/sr-finra-2007-021/finra2007021.shtml. For an in depth examination of this controversial rule, see §12-24 of Securities Arbitration Procedure Manual (5th Ed. Dec. 2007, Matthew Bender, http://bookstore.lexis.com/bookstore/product/7156.html).